TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 31

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C21000

UNCLASSIFIED

FM HONG KONG 150340Z OCT 83

TO IMMEDIATE FCO

TELEOPAM NUMBER 1529 OF 15 OCTOBER

HICK

100/7

„SVÆRD IN WARSOBY NO. K

20 OCT 1983

INFO IMMEDIATE UKDEL IMF/IBRD WASHINGTON, WASHINGTONNDEE HONG KONG GOVERNMENT OFFICE LONDON, HK GOVT REPS WASHINGTON, CG NEW YORK, UKMIS GENEVA, BRUSSELS

FOLLOWING IS TEXT OF STATEMENT REFERRED TO IN MIPT.

I WANT TO TELL YOU ABOUT TWO STEPS WHICH THE GOVERNMENT IS TAKING NOW TO STABILIZE THE EXCHANGE RATE OF THE HONG KONG DOLLAR.

2. FIRST LET ME GIVE YOU SOME BACKGROUND. FOR 37 YEARS FROM 1935 TO JULY 1972 THE HONG KONG DOLLAR WAS PEGGED TO STERLING. IN THOSE

DAYS THE STERLING AREA EXISTED AND FOR MOST OF THAT PERIOD THE INTERNATIONAL MONETARY SYSTEM WAS CHARACTERISED BY FIXED EXCHANGE RATES. FROM 1972 TO NOVEMBER 1974 THE HONG KONG DOLLAR WAS PEGGED TO THE U.S. DOLLAR. SINCE 1974 HONG KONG IN COMMON WITH OTHER MAJOR MARKET ECOMONIES HAS HAD A FREELY FLOATING EXCHANGE RATE. THIS FLOATING SYSTEM HAS SERVED US WELL. IT HAS GIVEN US A MEASURE OF INSULATION FROM THE UPS AND DOWNS OF OTHER ECONOMIES, AND UNDER IT HONG KONG HAS RECORDED VERY HIGH RATES OF ECONOMIC GROWTH. LIVING STANDARDS HAVE RISEN ACCORDINGLY.

3. TOWARDS THE END OF LAST YEAR THE EXCHANGE RATE STARTED MARKEDLY TO WEAKEN, REFLECTING AMONGST OTHER FACTORS UNCERTAINTIES ASOUT HONG KONG'S FUTURE.

4. BEFORE THE GOVERNMENT ANNOUNCED THREE WEEKS AGO THAT IT WAS CONSIDERING PROPOSALS TO STABILISE THE EXCHANGE RATE, CURRENCY DEPRECIATION WAS TENDING INCREASINGLY TO FEED ON ITSELF IN AN UNSTABLE AND IRRATIONAL MANNER. THIS DEPRECIATION WAS NOT JUSTIFIED BY SITHER CURRENT ECONOMIC DEVELOPMENTS OR FUTURE PROSPECTS. THE ECONOMY HAS REBOUNDED AND IS DOING VERY WELL. THERE IS LITTLE UNEMPLOYMENT AND EXPORTS ARE BOOMING. HONG KONG HAS SUBSTANTIAL FOREIGN CURRENCY RESERVES, A GENERALLY LIQUID BANKING SYSTEM AND VIRTUALLY NO GOVERNMENT DEBT.

5. THE GOVERNMENT HAS BEEN CONCERNED BY THE FALLING EXCHANGE RATE AND HAS DONE EVERYTHING IN REASON, WITHIN THE ESTABLISHED FRAMEWORK, TO ATTEMPT TO STABILISE T. THESE EFFORTS HAVE ACHIEVED ONLY LIMITED SUCCESS.

6. THE CIRCUMSTANCES OF HONG KONG PRECLUDE EXCHANGE CONTROL. AFTER A THOROUGH EXAMINATION OF REALISTIC OPTIONS, WE HAVE NOW DECIDED TO ALTER THE FRAMEWORK WITHIN WHICH THE EXCHANGE RATE IS DETERMINED. WITH EFFECT FROM MONDAY 17 OCTOBER, THE TWO NOTE- ISSUING BANKS WILL PAY THE GOVERNMENT'S EXCHANGE FUND FOR ADDITIONAL CERTIFICATES OF INDEBTEDNESS, WHICH THEY ARE REQUIRED TO HOLD AS BACKING FOR ANY INCREASE IN THEIR NOTE ISSUES, IN FOREIGN EXCHANGE AT A FIXED RATE OF HONG KONG DOLLARS 7.80 EQUALS U.S. DOLLARS 1.

17.

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